Study of U.S. Health Care System Finds Both Waste and Opportunity to Improve

WASHINGTON — The American medical system squanders 30 cents of every dollar spent on health care, according to new calculations by the respected Institute of Medicine. But in all that waste and misuse, policy experts and economists see a significant opportunity — a way to curb runaway health spending, to improve medical outcomes and even to put the economy on sounder footing.

“Everybody from Paul Krugman to Paul Ryan agrees it is essential to restrain costs,” said Dr. Mark D. Smith, the president of the California HealthCare Foundation and the chairman of the committee that wrote the report, referring to the liberal economist and Op-Ed columnist for The New York Times, and the conservative Wisconsin congressman who is Mitt Romney’s vice-presidential running mate. “The health care industry agrees, too.”

The Institute of Medicine report — its research led by 18 best-of-class clinicians, policy experts and business leaders — details how the American medical system wastes an estimated $750 billion a year while failing to deliver reliable, top-notch care. That is roughly equivalent to the annual cost of health coverage for 150 million workers, or the budget of the Defense Department, or the 2008 bank bailout.

The institute’s analysis of 2009 data shows $210 billion spent on unnecessary services, like repeated tests, and $130 billion spent on inefficiently delivered services, like a scan performed in a hospital rather than an outpatient center.

It also shows the health care system wasting $75 billion a year on fraud, $55 billion on missed prevention opportunities and a whopping $190 billion on paperwork and unnecessary administrative costs. The Institute of Medicine is an independent adviser to the government and the public, and part of the National Academy of Sciences.

The report depicts a system that saves lives in miraculous fashion, but is also expensive and outmoded and in some cases downright Kafkaesque.

“If banking were like health care, automated teller machine transactions would take not seconds but perhaps days or longer as a result of unavailable or misplaced records,” the report said. “If home building were like health care, carpenters, electricians and plumbers each would work with different blueprints, with very little coordination.”

Along with the squandered money there is a human toll, the report said, as medical errors and inefficiencies mean that doctors fail to deliver the best and most timely care to patients.

“If the care in every state were of the quality delivered by the highest-performing state, an estimated 75,000 fewer deaths would have occurred across the country in 2005,” the report said.

But the report — and independent health care experts and economists analyzing it — identified an opportunity in that $750 billion of wasted health spending. If hospitals, doctors and insurers could wring even a fraction of that money out, it would help to bend the so-called cost curve of runaway health inflation while improving patient outcomes.

The point of the report is that “Americans should expect to get and should demand to get better value for their health care dollar,” Dr. Smith said.

“That money is not only not buying anything,” said David Cutler, the Harvard health economist. “It is actually a sign of poor care. A lot of cost reductions, if we do them the right way, would mean improved health, not worse health.”

Professor Cutler gave as an example rules to make sure that doctors do not perform inductions for otherwise healthy pregnant women before 39 weeks of gestation. It would both save money and improve health outcomes by reducing the rate of Caesarean sections, he said.

The report gives recommendations intended to reduce spending and improve care: ensuring doctors work in teams and share information; making prices and costs transparent to consumers; rewarding doctors for outcomes, not procedures; ensuring all doctors use the best-tested practices, and identifying and correcting errors among them.

Some health economists and policy experts believe that political changes and financial pressure have already spurred insurers and health care providers to start squeezing out costs, contributing to the slowdown in health spending growth seen in the past few years.

“We’re starting to see some very early results,” said Wendy Everett, the president of NEHI, a health care research group based in Cambridge, Mass.

She said she expected to see more and more adoption of best practices in the next few years, spurred by President Obama’s Affordable Care Act, other changes to Medicare and Medicaid and a recognition among doctors and insurers that the current trajectory of health care spending is unsustainable.

“This train’s coming much faster than we thought,” Ms. Everett said. She guessed that within a decade providers being paid for the quality, not quantity, of care would be “the norm.”

A version of this article appears in print on September 12, 2012, on page A22 of the New York edition with the headline: Study of U.S. Health Care System Finds Both Waste and Opportunity to Improve. Order Reprints|Today's Paper|Subscribe